Regardless of whether the fiscal cliff was resolved, people on the lower end of the income scale were bound to feel financial strains, and by extension Wal-Mart’s (NYSE:WMT) balance sheet was expected to feel pressure as well. The uncertainty that the fiscal cliff created during the holiday season and the measures that Congress passed to reach a resolution may be the reason the retailer has underperformed relative to general market over the last month.
As The Daily Beast noted in a recent article, since Wal-Mart “serves a lower- to lower-middle-income customer, it is a pretty good proxy for what is happening in the bottom, say, 40 percent of the U.S. economy.”
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Now that the fiscal cliff has temporarily been avoided, economists at the New York Federal Reserve have begun to analyze the effects of the payroll tax increase. Most of the fiscal debate has neglected how tax changes will hurt low-income earners as the majority of the slated updates will be felt by taxpayers making more than 400,000 or benefiting from capital gains and dividends. But the payroll tax, the regressive tax levied on the first $110,100 of income that funds Social Security and Medicare, is set to rise by 2 percent. In both 2011 and 2012, President Obama and the Congress agreed to lower the tax from 6.9 percent to 4.2 percent, which meant that workers had additional income to spend.
Any reduction in income will change how much shoppers spend at Wal-Mart. Since the recession began in 2008, the company’s sales have been subject to a payroll cycle; sales rise when paychecks are issued and subsequently shrink over the course of the two-week pay period. This trend continued into 2012. As Wal-Mart’s Chief Executive Officer Mike Duke said in early December, “customers are still working to get by month to month, paycheck to paycheck.”
The company generates approximately 70 percent of its income from sales in the United States, and the payroll tax increase has given Wal-Mart much to fear. The Fed’s research, conducted this month, showed that workers planned to “reduce consumption by 71.4 percent of the amount of the tax cut, followed by a reduction in savings of 26.1 percent of the size of the tax cuts, and an increase in debt of 2.4 percent of the tax cut amount.”
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